20th February 2017 - Why Residential Properties in Gurgaon have and should continue to display better capital appreciation than office assets over the next 5 years
To better understand the difference between residential and office asset trending let's first understand the basic characteristics of each :
Residential Assets :
1) driven by end user and speculative demand
2) High supply market
3) Varied segments of properties
4) Shelf life of residential properties exists
Office assets :
1) Driven largely by speculative demand
2) Larger tendency of corporates to lease rather than buy
3) Higher rental yield potential than residential assets
4) Fewer grades in office properties than in the residential segment
Next, we must also understand that there is a symbiotic relationship between residential and office assets.
Wherever residential developments come up office properties are there normally as ecosystem conglomerates by developers as also malls and other infrastructural facilities like schools, hospitals, hotels, etc.
In Gurgaon limited supply of land was the reason for prices of landed properties to rise during boom cycles, the trend then changed to apartment living. Upward supply spikes saw downward trend in price movements and we also then saw pie enlargements and price appreciation owing to the mushrooming of Gurgaon as a millenium city with end user and speculative demand fuelling growth.
In the office segment, we saw heavy investment in small and large size office plates in the past. Capital appreciation was recorded in boom cycles as also there were price corrections downward in bust cycles. Two things to note for the case of office properties as reasons for lower capital appreciation potential than residential properties :
a) Higher starting base or cost price of office assets visa via residential assets thereby notionally in the minds of investors a hindrance to capital appreciation potential
b) Illiquidity of larger office plates which is a problem till today
To 2017 and where we see things going from here. Demand will be further boosted in the residential segment by end user demand at a somewhat slower but steadier pace than before. Besides structural changes and improvements in the market should lead to more transparency and predictable returns. Golf Course Extension road is both in terms of pie size enlargements and connectivity wise good in terms of capital appreciation potential for both residential and office assets. We should see more end user demand in residential properties in these areas for the medium to long term as also the continuing trend of corporates to lease rather than buy in these cheaper office leasing localities as they shift bases or expand.
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